Double Witching

Double witching occurs when any two of the different classes of stock options, index options, stock index futures or single stock futures expire on the same day. It is similar to triple witching, and quadruple witching, except only two of the four classes of options or futures expire on the same day.

Double witching days, like triple-witching and quadruple-witching days, can result in increased trading volume and volatility, especially in the final hour of trading preceding the closing bell — which is known as the witching hour. While contracts that are allowed to expire may necessitate the purchase or sale of the underlying security, traders who only want derivative exposure have to close, roll over or offset their open positions prior to the close of trading on double witching days. And speculators may add to volatility by looking for arbitrage opportunities.

The phenomenon of quadruple witching happens just four times a year on the third Friday of March, June, September and December, when stock options, stock index futures, index options and single stock futures all expire on the same day. Double witching is most likely to occur on the third Friday of the eight months that are not quadruple witching. On double witching days, the expiring contracts are typically options on stocks and stock indices, because futures options expire on different days depending on the contract.

As quadruple witching has never really caught on as a term, even though triple witching days have also included the expiration of single stock futures since 2002, quadruple witching days are still sometimes referred to as triple witching days.

A futures contract, which is an agreement to buy or sell an underlying security at a predetermined price on a specified day, mandates the agreed-upon transaction to take place after the expiration of the contract. For example, one futures contract on the Standard & Poor’s 500 index (S&P 500) is valued at 250 times the value of the index. If the index is priced at $2,000 at expiration, the underlying value of the contract is $500,000, which is the amount the contract owner is obligated to pay if the contract is allowed to expire.

To avoid this obligation, the contract owner closes the contract by selling it prior to expiration. After closing the expiring contract, exposure to the S&P 500 index can be maintained by purchasing a new contract in a forward month. This is referred to as rolling over a contract.

Options that are in the money present a similar situation for holders of expiring contracts. For example, the seller of a covered call option — who generates an income stream by holding a long position in a stock while writing call options on that stock — can have the underlying shares called away if the share price closes above the strike price of the expiring option. In this situation, the option seller has the option to close the position prior to expiration to continue holding the shares, or allow the option to expire and have the shares called away.

While much of the trading in closing, opening and offsetting futures and options contracts during double witching days is related to the squaring of positions, the surge of activity can also drive price inefficiencies, which draws short-term arbitrageurs. These opportunities are often the catalysts for heavy volume going into the close, as traders attempt to profit on small price imbalances.